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Santa Clara University, my university, is a Catholic, Jesuit University, and its endowment fund follows its values: the sacredness of life, human rights, opposition to discrimination, opposition to nuclear weapons, and protection of the environment. We want our university’s endowment to earn high returns to support our students, faculty and staff. Do we sacrifice investment returns for our values?

A member of the Church of the Brethren faces the same question. “People from the church ask us fairly regularly whether we give up anything in terms of returns for our values. Often it’s phrased just that bluntly: “How much does it cost me to invest with you and exclude those things from my portfolio?” It turns out that Santa Clara University and the Church of the Brethren sacrifice no returns for their values. Indeed, evidence from my studies and those of others indicates that wise investors need not sacrifice returns for values.

Who are socially responsible investors?

Social responsibility means different things to different people, and socially responsible investors express different values. Some express a single value, such as protection of the environment, while others express several values, such as avoidance of tobacco, alcohol, and gambling. The differing values are reflected in the many alternatives to the term ‘socially responsible investing,’ including environmental, societal, and governance (ESG) investing, sustainable investing, green investing, ethical investing, mission based investing, values-based investing, and religion-based investing.

“For our church, investing according to socially responsible principles is more a matter of integrity than making a major difference,” said the member of the Church of the Brethren. “That is, if we believe tobacco has an overwhelmingly negative influence on society, we should not profit from it. If we made money on a tobacco investment, on the whole we’re worse off, even if we took every penny we made and reinvested it in beneficial programs… I occasionally see articles by investment columnists on the ‘sin’ funds that invest primarily in tobacco and alcohol, etc., advising people to take their profits from these funds and do good with them. That argument seems completely backwards to me, because the money is already out there supporting bad things.”

Socially responsible investors draw their inspiration from religion, family, books and their own experiences. “Although I was raised secularly for the most part,” said one investor, “my core values come from my family’s religious tradition, that is, that Jewish people believe in social justice. My grandfather emigrated from Eastern Europe when he was 14. He was one of the founders of a major union local and then went on to start his own business. When I was a teenager, I was doing some work for him when there was a strike at his business, and he told me I couldn’t cross the picket lines. My mother said, “You have to go to work and help him,” but my grandfather said, “You can’t do that.” Those are the experiences and the key framework that led me to emphasize feminist and workers’ rights in my investing.”

“I have an undergraduate degree in molecular biology and worked in biotech and the pharmaceutical industry for seven years,” said another investor. “At that point, I hadn’t taken any environmental classes and didn’t even have a strong interest in the environment. My interest arose later, largely as the result of reading books…I also began to recognize that I didn’t agree with how the pharmaceutical industry was run. I was uncomfortable with several ethical flaws ingrained in the system…Part of me recognized that it’s a business, and it’s not going to change, but I decided I didn’t want to participate any more… I eventually ended up going back to school for my master’s in environmental science and management.”

There are three alternative hypotheses about the relative returns of the stocks of socially responsible companies and conventional companies. The first hypothesis is the ‘doing good but not well’ hypothesis, where the returns of socially responsible stocks are lower than the returns of conventional stocks. This hypothesis might be true if the costs paid by a company for being socially responsible exceed the benefits to shareholders. For example, company managers might invest too much in social responsibility because they enjoy the personal honors they receive for being socially responsible, while shareholders receive lower returns.

The second hypothesis is the ‘doing good while doing well’ hypothesis, where the returns of socially responsible stocks are higher than those of conventional stocks. This is possible if managers underestimate the benefits of being socially responsible or overestimate its costs. Consider, for example, the managers of BP before the major oil spill in the Gulf of Mexico. They could have invested more in safety measures that would have done good, preventing the spill and the environmental damage it created, and they would have done well, saving the heavy costs of cleaning the spill and compensating victims.

The third and last hypothesis is the ‘no effect’ hypothesis where the returns of socially responsible stocks are equal to the returns of conventional stocks. The ‘no effect’ hypothesis might be true, for instance, when the extra costs of higher employee pay are equal to the extra productivity of more satisfied employees.

I have found in my studies that the returns of socially responsible mutual funds were approximately equal to those of conventional mutual funds, and that socially responsible indexes had returns approximately equal to those of conventional indexes. These studies are consistent with the ‘no effect’ hypothesis, where social responsibility neither increases nor decreases returns.

Yet perhaps the most important finding is that it is wise to avoid funds with high costs, whether socially responsible or conventional. The returns of socially responsible funds with high costs trailed the returns of socially responsible index funds and asset-class funds with low costs. The same is true for the returns of conventional funds. Socially responsible investors need not sacrifice returns for their values, as long as they invest wisely.